How Does Liquidation Work for Insolvent Companies?

What is Liquidation?

Simply put, liquidation is the process of putting an end to a business. It means that it will no longer trade or operate. By this process, its assets are sold to pay off debts and shareholders and give salaries to employees.

This kind of occurrence only happens when a company is found to be insolvent. Insolvency is the state of not being able to pay the dues on time for a long period.

Find Out About the Different Types of Liquidation

There are two different kinds of liquidation called voluntary and compulsory liquidation that are both explained below:

This kind of liquidation occurs when the owner or shareholders of a company decides that the business is no longer fit to run. By choosing to voluntarily liquidate, they eliminate the chances of them to be liquidated forcefully and falsely accused.

The owner or shareholders will conduct a meeting with creditors. The people decide which liquidator should handle the liquidation process. The terms with regard the distribution of assets are also discussed and agreed in this meeting.

Compulsory Liquidation

This kind of liquidation is an order from the court. Most likely, creditors file a request for a certain company to be liquidated. It is believed that it is risky when the court brought an owner or the shareholders to the court because of the request of the creditors. There can be wrong accusations that can happen.

Generally, this happens to businesses that are having problems to pay their dues. Creditors can be pushed to their limits by the continuous non-payment of a company. The reason why it is called compulsory is that the owner or shareholders of the company do not decide for their company to be liquidated but the court itself. It is a demand or an order from the court.

4 Steps in the Liquidation Process There are four steps that a liquidation process goes through. The following below is a summary of the four steps:

Appointing of a Liquidator -When the shareholders have a meeting, they agree on which liquidator should take care of the process that is needed to be done. They also agree on what the terms are the should be followed in paying off debts and dividing the assets.

Collection of Assets – The liquidator that is appointed will then record and collect the assets that the company has in their possession. The liquidator sells these assets if necessary and gathers the income that comes from the said sale.

Paying Off Debts and Dividing Surplus – The income will then be used to pay off the creditors. The rest will then be divided according to the agreed terms for all the shareholders of a company.

Formal Dissolving of a Company – After all of these are finished, the company will then be formally dissolved using certain documentation with papers for legality.

What Should Be Done Before Going Through Liquidation

Collection of Outstanding Payment

It should be ensured by the company that any outstanding accounts receivable should be collected. Even if you need to collect the payment as soon as possible, you should not announce the closure of your company. What needs to be done is to emailing and calling them continuously to demand payment.

Completion of Pending Jobs

When it comes to pending jobs that you need to finish, you have to inform your clients about your business closing down. You also need to finish the pending jobs or projects to avoid lawsuits. On the other hand, you can refund your clients in case you really cannot finish several outstanding jobs on time.

Payment for Employees

You can either notify your employees ahead of time for them to have a chance to search for a new job or you can tell them in the last minute so you will avoid a surge of resignation. The latter is not a good thing if you are looking to finish off pending jobs for your clients.

This is why it is good for owners who interact with their employees and know them well. It is easy for them which is the best thing to do in this situation.

Although there are only four general steps that are taken in a liquidation process, these steps are should be handled by a regulated liquidator.

Different jurisdictions mean that there is different documentation that is needed before the complete deregistration of the company happens.

Experts on this and liquidators themselves can give you insights with regard to how a liquidation actually goes down based on their experience. Farahat & Co. has a team of regulated liquidators, operating for 35 years now.

You can discuss your concerns with us today by booking a free consultation with one of our regulated liquidators.